Vietnam yesterday announced its biggest currency devaluation in years, but analysts said the government must do more to address a complicated mix of problems — including a huge trade deficit and high inflation.
In a widely expected announcement, the State Bank of Vietnam said the average interbank exchange rate had been adjusted by 9.3 percent to 20,693 dong against the dollar, compared with 18,932 dong previously.
It said in a statement the decision was aimed at “ensuring the liquidity of the market, contributing to curb the trade deficit and supporting the implementation of more active and flexible monetary policies.”
The move comes after the ruling Communist Party’s congress last month set an economic framework for the coming years, with leaders noting a need to “stabilize the macroeconomy.”
Vietnam has recorded impressive growth, but economic expansion has come with increased risks, including higher inflation and currency pressure. The country has also seen falling foreign exchange reserves and a relatively high current account deficit, the broadest measure of external trade.
Le Dang Doanh, of the Economic College of Hanoi, said devaluation and other steps were necessary “considering the huge trade deficit and the rapidly declining financial reserves of Vietnam.”
Devaluation might temporarily help reduce Vietnam’s imports, but it would also boost inflation because the price of imported fuel would rise, Doanh said.
Vietnam saw annual inflation hit 12.17 percent last month, far higher than its regional neighbors.
Benedict Bingham, Vietnam representative for the IMF, said the devaluation’s effectiveness would depend on whether it is underpinned by a greater focus on containing both inflation and public debt.
Policies on these issues would help address the underlying problem, which is people’s lack of confidence in the dong.
“That’s the issue that they need to get to grips with,” Bingham said.
Vietnam’s previous devaluation, by 2.1 percent, was in August last year.
Many Vietnamese hold dollars and gold — rather than their own currency — as a safe haven against economic uncertainty. The World Bank has said an unusually large amount of money held outside the country’s official foreign exchange reserves has pressured the unit.
Unlike its neighbors, whose currencies strengthened in recent months as confidence in their economies attracted a flood of overseas capital, Vietnam’s dong has consistently struggled.
The central bank yesterday also tightened the daily trading band for buying and selling dollars by commercial banks, to 1 percent from the previous 3 percent of the interbank exchange rate.
Ratings agencies Moody’s and Standard & Poor’s recently downgraded Vietnam’s debt rating over worries about the economy, the banking sector and the problems of nearly bankrupt state-owned shipbuilder Vinashin.